1)One of the major advantages of industry concentration for a professional accounting firm is that the firm is able gain a lot of experience in that sector which in essence would make the firm conduct its audits more efficiently.
Secondly, the accounting firm is able to borrow from the knowledge gained in handling a client in the industry and use it in handling a different assignment in the industry. This helps in ensuring that the firm doesn’t omit important procedures that are carried in the related companies.
Third, the firm is able to compare key financial indicators such as financial ratios in one company to the others in the industry so as to make decisions on the financial performance of the company in the audit assignment.
One of the disadvantages is that the firm is likely to become too familiar with the clients in the industry after many years of auditing them thus posing the threat of familiarity to independence.
2) To ensure high quality audit especially when the previous engagement staff have left the firm, the accounting firm should ensure that at least a partner with experience in the clients business is in charge of the client supervision. Secondly, the audit engagement team must be properly briefed on the particular assignment with particular emphasis on the risky areas and also areas that would require additional procedures or where a keener eye would suffice.
3) Auditors should design tests that are adequate enough to detect the weaknesses in the internal controls. A significant deficiency in the internal controls means that the controls in place are inadequate such that they cannot prevent any cases of frauds or errors. In this case, the auditor is expected to identify this deficiency and report to management so that the necessary action is taken. On the other hand, material weaknesses in controls indicates that controls are actually in place but are either not working or have been over ridden by the management. If the audit firm notes that the firms accounting and internal controls are in place and working properly, and if there are any accounting estimates made, are reasonable for that nature of business, then the firm is allowed to issue and unqualified opinion on the controls.
4) The audit of accounting estimates requires the auditor to check the reasonableness or otherwise of the estimates that are issued in the accounts by the client in the circumstances. The auditor is therefore expected to make a decision on whether in his opinion such estimates are reasonable in the circumstances.
5) Improper staffing- as explained, KPMG grossly understaffed the assignment in question.
The standards require that the audit engagement team should comprise of qualified auditors with sufficient training and experience which was a failure on the part of KPMG. However, with proper briefing and properly documented previous years working papers, KPMG would still have managed to do a great job had the client cooperated.
The independence of KPMG’s staff was also compromised because of the intimidating nature of the client’s accountant who was a former staff at KPMG and seemed to disrespect the engagement team, thus threatening the auditor’s independence. KPMG should have pooled out of the audit in this regard.
6) The mark to market rule requires that the companies dealing in mortgage backed securities capture the fair value of those securities in their balance sheets. This means that at each reporting period, the securities have to be revalued as per this requirement. This has led to the loss of value of these securities, one of the major causes of the financial crisis, this is also because mortgage backed securities were no longer attractive. As a qualified accountant, I believe that this requirement should be abolished and such securities should be carried in the book values in the accounts.
Michael C. Knapp.Contemporary Auditing: Real issues and case. Cengage Learning. 2012